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Investment firm weighs in on 'preferred candidate pair' for APS

PHOENIX -- It will be good for Arizona Public Service Co. if Tom Forese and Doug Little win election to the board that regulates utilities in the state, according to analysts working for UBS Investment Research in New York.

Investment firm weighs in on 'preferred candidate pair' for APS

It will be good for Arizona Public Service Co. if Tom Forese and Doug Little win election to the board that regulates utilities in the state, according to UBS Investment Research.

It will be good for Arizona Public Service Co. if Tom Forese and Doug Little win election to the board that regulates utilities in the state, according to analysts working for UBS Investment Research in New York.(Photo: The Republic)

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UBS analysts said that Tom Forese and Doug Little would be better regulators for APS than their opponents.

The analysts research good investments, and suggest the company will do better with the preferred candidates.

It will be good for Arizona Public Service Co. if Republican Tom Forese and Doug Little win election to the board that regulates utilities in the state, according to analysts working for UBS Investment Research in New York.

The analysts, who evaluate potential investments and recommend whether to buy the stock, said Forese and Little are "preferred" to Republicans Vernon Parker and Lucy Mason.

The four regulatory candidates, who are squaring off for the Republican nomination in a contentious race for two open seats on the five-member Arizona Corporation Commission, have seen more money spent on opposition advertising than some of the candidates for governor. The commission sets power rates for APS and other utilities.

"Despite continued mud-slinging over politics and practices, we suspect the community overall is supportive of the preferred candidate pair for APS (Tom Forese/Doug Little) over the other candidate team (Lucy Mason/Vernon Parker)," wrote Julien Dumoulin-Smith, UBS executive director of equity research in a Thursday note to investors.

He said he assumes the winners of the Republican primary will defeat Democrats Jim Holway and Sandra Kennedy in the general election.

With things looking positive for APS, the UBS analysts maintained a recommendation to buy stock in its parent company, Pinnacle West Capital Corp., with the expectation shares eventually will be worth $60, compared with $54.52 Thursday.

Parker and Mason participated in a recent rally for rooftop solar where some participants protested APS and its solar policies.

"Anyone who is investing in the state would be really scared of someone advocating against the company at public demonstrations," said Dumoulin-Smith in an interview Friday. "That is a very worrying sign."

He said the election in Arizona has created an atmosphere of negativity around utility regulators unlike any other in the nation. Only 12 other states have elected utility regulators, with the rest appointed.

"It's gruesome," Dumoulin-Smith said of the primary election.

In addition to attending the solar rally, Parker and Mason have benefited from advertising paid for by a pro-rooftop solar group called TUSK, Tell Utilities Solar won't be Killed.

Forese and Little have benefited from outside advertising paid for by "dark money" groups that choose not to disclose their donors, although APS has said it will participate in the election to counter messages from TUSK and is suspected by many to be behind the ads.

Forese and Little's campaign manager Alan Heywood issued a statement on their behalf in response to questions about the UBS report.

"Tom and Doug are not anti-solar and they are not pro-APS," he said. "They are pro-Arizona ratepayers and they take seriously their obligation and duty to represent the people of Arizona in a fair and honest manner as commissioners serving on the Arizona Corporation Commission."

APS spokesman Jim McDonald said that UBS analysts came to the conclusion that Forese and Little are the preferred candidates on their own, and that utility executives did not discuss the outcome of the election with them.

"Our (Chief Financial Officer) Jim Hatfield and Director of Investor Relations Paul Mountain just returned from a trip in which they met with several investors," McDonald said. "Our financial people routinely go on the road for discussions with financial analysts and, in fact, talk every day with analysts. It is an important part of what we do."

UBS has provided investment banking services for APS' parent company, Pinnacle West Capital Corp., in the past year. Dumoulin-Smith said it is not the job of UBS to be a "mouthpiece" for APS.

While the analysts view Forese and Little as better for the utility, Dumoulin-Smith said that doesn't necessarily mean their election would be bad for utility customers. He said having a stable utility company with a consistent profit helps keep rates low.

"A struggling utility drives higher (utility) bills, full stop," he said. "Frankly, you want a company that is consistent and has a reasonable relationship with regulators. It is important a balance is struck. Having someone out there protesting does not strike that balance."

Dumoulin-Smith also said that a recent decision to delay the next rate case will be good for APS because it will limit the influence of the rooftop solar industry in that proceeding.

APS last year asked the Corporation Commission to increase monthly bills on solar customers by $50 to $100 but give them more up-front incentives. That turned into an ugly battle. Eventually regulators voted to add an average of $5 a month to customer bills, with no new up-front incentives.

UBS analysts expect APS to request an increase in that fee.

On Tuesday, the commissioners voted 5-0 to grant APS's request to delay its next rate hearing from next year until 2016.

APS officials rejected the UBS assertion that the delay would limit the participation of the solar industry and said that the company doesn't plan to increase solar tariffs outside of a rate case.

Addressing tariffs outside of a rate case would mean that regulators would not have access to detailed financial information on which to base their decision.

"We have consistently said we have no current plans to ask the commission for any change in the $5-per-month charge on residential rooftop solar installations prior to the next rate case because we are focused on the broader rate-design discussion," McDonald said.